Thailand - Third Bangkok Port Project

RESTRICTED FILE COPY Report No. P - 8 5 3 This report was prepared for use within the Bank and its affiliated organizations. They do not accept responsibility for its accuracy or completeness. The report may not be published nor may it be quoted as representing their views. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE PORT AUTHORITY OF THAILAND (PAT) FOR THE THIRD BANGKOK PORT PROJECT WITH THE GUARANTEE OF THE KINGDOM OF THAILAND July 13, 1970  INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPP4ENT REPORT AND RECOTSF1ENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE PORT AUTHORITY OF THAILAND (PAT) 1,1TH THE GUARANTEE OF THE KINGDOH OF THAILAND 1. I submit the following report and recommendation on a proposed loan in various currencies equivalent to $12.5 million to the Port Authority of Thailand, to be guaranteed by the Kingdom of Thailand. PART I - HISTORICAL 2. The Bank has made two loans for port development. The first, 37-TH in 1950, was for 4h.4 million and has been fully repaid; the second, 151-TH in 1956, was for $3.4 million and will be fully repaid by August 15, 1971. Both projects were carried out satisfactorily. 3. The Port Authority of Thailand (PAT) which would be the borrower of the proposed loan, was established as an autonomous organization in 1951 as a condition of the first port loan, to administer the port of Bangkok at Klong Toi on the Chao Phraya River. 4. Negotiations were held in ,ashington from June 22 to 26. The Government was represented by H.E. Sunthorn Hongladarorn, the Ambassa- dor of Thu.;land in Washington and Dr. Sirilak Chandrangsu, Under Secretary of State for Communications; PAT was represented by Captain Lapo Israngkura, Deputy Director (Operations). 5. The proposed loan would be the twenty-second loan in Thailand and woruld incrc-l.se the total amount lent to $370.9 million net of can- ce e -o. .A; The folloi^4ng is a summary statement of Bank loans to Thai- land as of May 31, 1970:  -2- Loan (USV million) No. Year Borrower Purpose Amount.Bank Undisbursed Thirteen loans fully disbursed: 164.9 -0- 394-TH 1964 Kingdom of Thailand Meklong Irrigation 22.0 5.5 455-TH 1966 Kingdom of Thailand National Highways 36.0 7.8 h71-TH 1966 Kingdom of Thailand Vocational Education 6.0 3.4 489-TH 1967 E.G.A.T. (YEA) Power 5.0 o.0 51L-TH 1967 Kingdom of Thailand Sirikit Dam Irrigation 26.0 9.8 535-TH 1968 Kingdom of Thailand National Highways 29.0 13.8 626-TH 1969 Kingdom of Thailand " " 23.0 21.9 655-TH 1970 E.G.A.T. Power 46.5 406.4 Total (net of cancellations) 358.4h of which has been repaid to Bank and others 65.0 Total now outstanding 293.L Amount sold 59.7 a/ of which has been repaid 13.1 46.3 Total now held by Bank 207.1 Total undisbursed 109.0 a/ Of which $h1 million sold to the Bank of Thailand.  - 3 - 6. Disbursement of Loan No. l71-TH (Vocational Education Pro- ject) was delayed by slowness in appointing consultants under bilateral aid, but good progress is being made. Construction of the Sirikit (Phasom) Dam (Loan No. 51h-TH) was somewhat delayed because of unfavorable geologi- cal conditions at site, and the need to redesign somes features of the project. Satisfactory progress, however, is now being made. Otherwise, the implementation of Bank-financed projects is progressing satisfactorily. 7. A project to expand and improve the facilities of Kasetsart (Agricultiral) University has recently been prepared for Bank appraisal, and is expected to be ready for consideration by the Executive Directors before the end of FY 1971. A proposed second loan to the Industrial Finance Corporation of Thailand will be submitted for Executive Directors, consideration in the early months of FY 1972. 8. No IDA credits have been made to Thailand. IFC has invested $193,000 in shares of the Industrial Finance Corporation of Thailand and in 1969 made a loan of $18 million to, and an equity investment of $4.1 million in, the Siam Cement Group of companies. PART II - DESCRIPTION OF THE PROPOSED LOAN 9. Borrower: Port Authority of Thailand (PAT). Guarantor: Kingdom of Thailand. Amount: In various currencies equivalent to US $12.5 million. Purpose: Tb help finance the construction, at the port of Bangkok, of four deep-water berths, two lighterage berths, two transit sheds and related works; technical assis- tance for dredging operations and accounting; and consultants' services. Amortization: In 20 years including a four-year period of grace, through semi- annual installments beginning September 15, 197L and ending IMarch 15, 1990. Interest: 7% per annum. Commitment Charge: 3/4% of 1% per annum. Internal Rate of Return 20%  - 4 - PART III - THE PROJECT 10. An appraisal report entitled "Appraisal of Third Bangkok Port Project Thailand" (PTR-46) dated July 13, 1970, is attached. 11. The port of Bangkok is the largest of Thailandts 22 ports, and except for crude oil, handles 95% of the country's imports and 80% of its exports. Crude oil is imported at Sriracha, about 100 mn southeast of Bangkok. Military cargo, mostly in container form, is imported at Sattahip about 170 km southeast of Bangkok. The Port Authority of Thailand is entrusted with the administration of the port of Bangkok at Klong Toi, and is responsible for dredging and maintain- ing the navigation channel from Bangkok to the Gulf of Thailand. PAT is an autonomous Government organization responsible to the Ministries of Finance and Communications, and its capital budget is subject to the approval of the Cabinet. It is managed by a Board of Commissioners and a full time director. The Government has agreed to appoint a Commissioner from the commercial sector to the Board. PAT is well able to carry out the project, and has agreed to retain cosmultants to assist it in areas where such help would be useful. 12. Between 1951 and 1965, import tonnages at Klong Toi grew at an annual rate of about 6% per year. Between 1965 and 1967, there was a rapid increase in tonnage handled, but it has since remained almost constant. It is projected that traffic will grow at about 2.5% per year until 1973, and then attain its pre-1965 growth rate of about 6%. The port of Bangkok also handles imports to Laos, which amounted to 52,000 tons in 1969, and which are expected to increase at an annual rate of 8%. 13. Exports from Bangkok consisting mostly of rice and other agricultural products, amounted to five million tons in 1969, handled by lighters in the rivers or from silos. Export cargo loaded from the port wharves amounted to only 33,000 tons and consisted mostly of live- stock, wood and general cargo. It has been assumed that exports will increase at an annual rate of 15% for some time to come. 14. The expansion of Bangkok is urgently required. Because of congestion at the port, the shipping lines serving the port imposed surcharges in 1967 which cost Thailand almost $h million in the six peak months of 1967 alone. Various short-term measures were taken to reduce congestion, and by 1968, the surcharges had gradually been removed. None of the measures taken, however, added any physical capacity to the port. At present traffic has again reached the 1967 level even though military traffic has been diverted to the port of Sattahip on the Gulf of Thailand.  15. During the Thai fiscal year ending September 30, 1969, about 1,900 general cargo vessels called ati Bangkok and discharged some 2,260,000 tons of cargo, most of which was handled at the Klong Toi wharves. However, because of congestion some 150,000 tons were diverted to private wharves on the Chao Phraya River and another 190,000 tons were unloaded at midstream anchorages, into lighters. 16. The proposed project forms part of PAT's development program for 1970-1975, and consists of the construction of four deep-water berths and two lighterage berths, two transit sheds and ancillary works; tech- nical assistance of experts in dredging and in accounting; and consult- ants' services for engineering and supervision during construction and for a review of PAT's cargo handling methods. The total estinated cost of the project is about Z21 million, of which the proposed loan of $12.5 million would cover the foreign exchange component, estimated at 60% of total costs. In addition to the proposed project, PAT plans expenditures totalling about X23 million on such items as the improvement of roads within the port, extension of sheds, the purchase of cargo handling equip- ment and harbor craft, offices and staff quarters. 17. Construction of four deep-water berths and two lighterage berths, with ancillary facilities, will solve Thailand's immediate port expansion requirements. PAT had originally requested financing for a project comlprising six deep-water berths and related facilities. The Bank's appraisal revealed that at this stage construction of four deep-water berths was the most economical alternative. PAT has agreed to employ management consultants to undertake a study of cargo handling methods with a view to increasing the productivity of wharf labor. Better cargo handling methods are likely to result in an increasein-productivity which would achieve about the same benefit as having two additional deep- water berths, wzithout incurring the cost of their construction at this time. Further expansion may, however, be required in the late 1970's, cpending upon the growth of traffic at Klong Toi and on port development schemes elsewhere in Thailand now under consideration by the Government. 18. Being a river port, Klong Toi is dependent on the maintenance of an unobstructed channel in the Chao Phraya River for access to the Gulf of Thailand. Heavy monsoon rains cause siltation in the river, and constant dredging is required to maintain a navigable channel. PAT has agreed to employ a dredging expert to assist it in improving dredging operations. 19. PAT also agreed to employ an accounting expert to assist it in improving accounting procedures, with particular reference to improv- ing its cost accounting system. An effective cost accounting system will enable PAT to levy charges in line with the cost of the services it provides. 20. PAT's financial position is sound, and its debt/equity ratio is satisfactory. PAT, which is authorized to set rates within ranges determined by the Council of Ilinisters, has agreed to take such action as may be necessary to maintain a rate of return of not less than 8% on the net value of fixed assets in operation. For purposes of debt control,  - 6 - PAT agreed that it would not incur any debt unless its net cash revenue for a given 12-month period was at least one and three quarters times the maximum debt service requirement in any succeeding fiscal year. At present, PAT has no other requests for loans pending, and its debt/equity ratio will be 18/82 in 1973 and 197h, thereafter improving to 16/84 when repay- ments of the proposed loan begin. In practice, the proposed debt control measures would cause PAT no difficulty in borrowing additional funds within reasonable limits. 21. Contracts for construction and supply will be awarded on the basis of international competitive bidding, in accordance with Bank guide- lines. 22. The project is expected to yield an internal rate of return of about 20%. PART IV - LEGAL INSTRUIJENTS AND AUTHORITY 23. The draft Loan Agreement between the Bank and the Port Autho- rity of Thailand, the draft Guarantee Agreement between the Kingdom of Thailand and the Bank, the report of the Committee provided for in Article 3, Section )! (iii) of the Articles of Agreement and the text of a resolution approving the proposed loan are being distributed to the Executive Directors separately. 2h. The draft Loan Agreement and the draft Guarantee Agreement follow the general pattern of recent agreements for port projects. PART V - THE ECONOIIY 25. A report on the "Current Economic Position and Prospects of Thailand" (EAP-la) was distributed to the Executive Directors on February 12, 1969, and a Basic Data sheet is attached as an Annex. A Bank econo- mic mission visited Thailand in February, 1970, and its report will be distributed to the Executive Directors about August 15, 1970. 26. During the 1960's the country experienced a high rate of economic growth; substantial increases in export prices and a high level of U.S. expenditures in Thailand, especially after 1965, stimulated rapid development. A dynamic private sector, aided by a rapid growth of foreign private investment, contributed to economic growth. The year 1969 marked the beginning of a transition phase as for the first time U.S. expendi- tures began to decline and export prices fell. During the years of ample foreign exchange receipts, imports were allowed to grow rapidly and this growth continued in 1969. As a consequence, foreign exchange reserves declined by about $50 million, or about 6 percent, in 1969 after a conti- nual increase ever since 1958. As of December 31, 1969, they still amounted to some $87 million, equivalent to 72 months imports.  - 7 - 27. The rapid growth of the Thai economy, combined with liberal access to foreign exchange provided the basis for monetary stability in recent years. Price increases were modest and credit could expand with relatively little restriction. Substantial deficits in the government budget could be financed in part by an expansion of the money supply without endanger- ing economic stability. The emergence of a balance of payments problem in 1969 has reduced the scope for expansionary financing in the public sector, because of its undesirable effects on import demand. Substantial further increases in government expenditures can, therefore, only be justi- fied if they are matched by increased public sector revenues. 28. The Government of Thailand recognizes the need to act on a wide front in order to cope with the problems it now faces. Measures to increase government revenues have been introduced effective July 1, 1970. Substantial increases in import duties and other indirect taxes on im- ported consumer goods of a non-essential nature will not only improve the budgetary position but also curb import demand. For the coming years, the Government recognizes the need to give the highest priority to the promotion of exports and specific measures are now being prepared to in- crease the country's foreign exchange earnings. These measures will include the promotion of the production of exportable goods and services; fiscal and price supports to producers of exportables, improvement of marketing, transport and storage facilities for these commodities, and revisions in the system of tax rebates to expor Brs. The impact of these measures will probably not be felt forsome time; if in the immediate future further reductions of import demand are required, the Government is resolved to take restraining measures of an indirect nature and to resort to quantitative controls only in exceptional circumstances. 29. The current Second Five-Year Plan wrill come to an end in September 1971. The Government is now drafting the Third Five-Year Plan (1971-1976). A change in development strategy is contemplated, which would shift the emphasis from the construction of new irrigation works to intensification of agriculture, especially in areas where irrigation facilities have been constructed in past years. The Government recognizes that this will have an impact on investment programs in several other sectors, especially power, transport and industry. At the same time the new investment program will concentrate on promotion of exports and of industries which depend less heavily on imported raw materials than has been the case in recent years. Effective implementation of the new development strategy requires the preparation of projects of a different kind than have been prepared and implemented in the past. Pre-investment studies must be initiated in order to generate such projects in sufficient quantity in time before the new Plan begins to be implemented. 30. In view of the favorable conditions under which the economy of Thailand has operated during the past years, the Government has not been under much pressure to deal promptly and effectively with economic problems and to adopt and implement appropriate policies. In fact, the coordination of activities among the many different departments in the public sector has been far from adequate, and will require substantial improvement if the new Plan strategy is to be implemented effectively. I have drawn the Government's attention to this problem and understand that it is now in the process of creating coordinating machinery which in due course may be expected to improve its capacity to adopt and implement the policies  - 8 - demanded by the more difficult situation in which Thailand now finds itself. 31. The main finding of the recent economic mission, with which the Government of Thailand concurs, is that substantial balance of payments problems will remain during the next few years. M4easures to promote exports, and to curb import demand, cannot be expected to avoid further substantial foreign exchange losses in the early years, in particular if U.S. expenditures in Thailand should decrease further.. It is therefore expected that Thailand will require gross capital inflows in the public sector during the Third Plan period amounting to about $500 million, com- pared to an actual inflow of about $300 million during the current Five- Year Plan. A meeting of the Consultative Group for Thailand will be convened in September 1970 to discuss Thailand's requirements of external assistance. At this stage the emphasis will be on the overall magnitude of the financial requirements and on the immediate and more specific needs for technical assistance and pre-investment studies. The initiation of these program studies is expected to lead to the formulation of a sufficent- ly large list of identified projects for submission to the Consultative Group meeting in 1971, around the starting date of the Third Five-Year Plan. 32. The sound financial position and economic stability of the country provide substantial creditworthiness. Present debt service lia- bilities are modest at h percent of exports for public debt and 15 percent when private debt is taken into account. The creditworthiness position will remain sound even wsith the subs tantial new external borrowing projected for the 1971-1975 period. PART VI - COMPLIAWCE lITH ARTICLES OF AGREE1ENT 33. I am satisfied that the proposed lan complies with the require- ments of the Articles of Agreement of the Bank. PART VII - RECO14204DATION 34. I recomnmend that the Executive Directors approve the proposed loan. Robert S. 11cNamara President Attachments VTashington, D.C. July 13, 1970  Al N THAILAND - BASIC DATA Baht 20.8 = USA1 Area 514,000 square km Population Total (mid-1969 estimate) 36.5 million Rate of Growth 3.3%o per annum Density (persons per sq. km.) 71 Gross Domestic Product Total (1968) $116.1 billion Rate of Growth, Constant Prices (1964-1968) 8A4% per annum Per Capita (1968) $158 Industrial Origin of Gross Domestic Product 1964-1968 1968 Agriculture 3 4*o% 31.7% Manufacturing, Ilining, Construction 22.h% 23.7% All Other Sectors 43.6% h4.6% Expenditure on Gross Domestic Product 1961t-1968 1968 Consumption 79.h% 79.1% - Private 69. 4L 68.6% - Public 10. O^'o 10.5% Fixed Investment 21.6% 23.8% - Private 11!.4% 15.9% - Public 7.25 7.9% Change in Stocks 1.0% 1.1%o Current Account Balance (deficit -) -2.0% -h.0% Expenditure on GDP 100.0% 100.0% Average Saving Rate 2h.6% 25.9% Marginal Saving Rate 32.1% - Resource Gap as 5 of Investment 3.8% 10.0% Annual Growth End 1969 Internal Financial Situation 1964-1968 (g Billion) Total Money Supply 10.3% 20.31 Time and Saving Deposits 23.8% 20.28 Bank Credit to Public Sector (gross) 18.3% 15.87 (net) 12.8% 7.96 Bank Credit to Private Sector (Gross) 17.3% 22.90 (net) -1.5% 2.62 Consumer Price Index (1962 = 100) 2.4' 116.co  Annual Growth FY 1969 Public Sector Operations FY 1961)-1968 (g Billion) Current Revenue 13.8% 18.18 Current Expenditure 13.9% 15.79 Surplus 13.3% 2.39 Capital Expenditure 17.8,' 7.39 Net External Assistance 5.5% 1.56 Annual Growth 1969 Balance of Payments 196v-1968 ($ lillicn) MXerchandise Exports, f.o.b. 6.7% 696.6 MIerchandise Imports, c.i.f. 1/ 13.5' 1.229.3 Net Invisibles (incl. private transfers) 0r9.9% 274.3 Current Account Balance (deficit -) 13.0% - 258.4 Public Transfers 7.2% 55.7 Private Sector Capital (net) 17.9% 115.5 - Direct Investment (net) (28.5%) (48.1) - Loans and Credits (gross) (21.3%) (171.7) (net) (2.7%) (58.9) Public Sector Capital (net) -19.0% -4.8 Net Foreign Exchange Reserves 11.20% 873.7 2/ External Debt 3/ 1965 1969 ($ million) Amount Outstanding and Disbursed 351.9 603.6 - Private Sector (147.9) (306.7) - Public Sector (20h).O) (296.9) Debt Service Payments 68.9 166.7 - Private Sector (Lh.h) (120.0) - Public Sector (24.5) (16.7) Debt Service Ratio. a. Percent of Exports of Goods and Services 9.0 14.8 - Private Sector (5.8) (10.7) - Public Sector (3.2) ( 4.1) b. Percent of Exports and Exchange Reserves )b.7 8.3 1/ Includes non-monetary gold, excludes military imports. 2/ Equivalent to 7.5 months importsof goods and services j Debt with an original or extended maturity of over one year. July 13, 1970